Themes > Current Issues
29.03.2010
Revisiting the Growth Story
C.P. Chandrasekhar
There
is an air of celebration within the economic policy establishment in
the country. India, it is argued, has weathered the global crisis well,
experienced an early reversal of the downturn in GDP growth during 2008-09
and is all set to return to the pre-crisis trajectory of 9 per cent
growth per annum. As evidence of these trends, the official Economic
Survey 2009-10 refers to the ''turnaround'' in the second quarter of
2009-10, when GDP grew by 7.9 per cent, and to the CSO’s advance estimates
of GDP for 2009-10, according to which the economy is predicted to grow
at 7.2 per cent per year during the fiscal year as a whole. In fact,
even the high inflation in food prices is partly attributed to the demands
generated by this recovery.
The 7.2 per cent figure is now repeatedly quoted by official spokespersons, with the Finance Minister reportedly declaring in his reply to the general discussion on the budget in the Lok Sabha that it ''was not a pipe dream but a reality''. If true, the 7.2 per cent figure does give cause for celebration. Though GDP growth is by no means the best indicator of a nation’s health, that figure is creditable given the global context in which it has been realised.
But is 7.2 per cent the true figure? What has been underplayed by the government and the media is that two days after the Economic Survey was released and a day after the budget was tabled in Parliament, the CSO put out its GDP figures for the third quarter of 2009-10. According to those figures, growth in the third quarter was down to 6 per cent from 7.9 per cent in the second quarter and a marginally higher 6.1 per cent even in the first quarter. The ''turnaround'' does appear to have been short-lived. Moreover, ''community, social and personal services'', which grew at 12.7 per cent in the second quarter, possibly as a result of the implementation of the Sixth Pay Commission’s recommendations, recorded a 2.2 per cent decline in its contribution to GDP in the third quarter. This, combined with a 2.8 per cent decline in GDP from ''agriculture, forestry and fishing'', brought the GDP growth rate down by close to 2 percentage points relative to the previous quarter.
This reversal of the turnaround raises a question. If the government is still sticking to its 7.2 per cent growth figure for 2009-10, what are the aggregate and sectoral GDP growth rates needed during the fourth quarter to ensure this outcome? Since the quarterly estimates of GDP at constant 2004-05 prices are available for the period starting with the first quarter of 2007-08, this is easy to compute. The figures indicate that GDP during the first three quarters of financial years 2007-08, 2008-09, and 2009-10, stood at Rs. 28,43,901 crore, Rs. 30,44,987 crore and Rs. 32,47,839 crore respectively. Given the actual, quick and advanced estimates of GDP for these financial years, the GDP during the fourth quarter stands at Rs. 10,49,556 crore and Rs. 11,09,986 crore during 2007-08 and 2008-09 and is predicted to be Rs. 12,05,225 crore in 2009-10.
The implication of this is that if the predicted 7.2 per cent rate of growth during fiscal 2009-10 is to be realised, growth during the fourth quarter will have to touch 8.6 per cent, compared with 5.8 per cent in the fourth quarter of 2008-09 and 6 per cent during the third quarter of 2009-10. Given quarterly trends thus far, this does appear a tough call.
Which are the sectors that are expected to contribute to this sharp recovery in quarterly GDP growth? Undertaking a similar exercise for the sectoral contributions to GDP, we find that the CSO expects growth in the fourth quarter of 2009-10 to remain negative (-0.1 per cent) in the case of agriculture, while rising sharply to 14.2 per cent in the case of ''electricity, gas and water supply'' (as compared with 7.8 per cent in the third quarter), 15.2 per cent in the case of ''financing, insurance, real estate and business services (7.8 per cent) and 15.7 per cent in the case of ''community, social and personal services'' (-2.2 per cent). These are the sectors that are expected to lift growth substantially, despite the poor performance of agriculture.
In sum, the optimism with regard to GDP growth is based on expectations of a sharp turnaround in services during the fourth quarter, when India is expected to overcome the effects of an unexpected slide in the third quarter. These expectations seem to apply to ''community, social and personal services'' as well, even though the Sixth Pay Commission effect that facilitated growth in this sector in earlier quarters is likely to be extremely weak, if present at all. Noting this is not to attempt to play spoiler in the midst of celebration. It is to make clear the kind of buoyancy on which predictions of creditable growth are based.
It could be argued that while the sectoral distribution of GDP growth predicted for the fourth quarter may not be realized, the aggregate growth rate would still match the CSO’s advance estimates, because manufacturing would perform much better in the fourth quarter than the CSO implicitly assumes. This view is supported by figures recently released by the CSO that are being interpreted as indicative of the fact that it is just not the stock market but also the real economy that has ''bounced back''. According to these figures, in January 2010 the index of industrial production (IIP) rose over the year on a month-on-month basis by 16.7 per cent for industry as a whole, and 17.9 per cent for manufacturing. In the case of manufacturing, this increase comes after month-on-month growth rates of 10.9 and 12.9 and 19.3 per cent respectively in October, November and December 2009. They therefore suggest that the sharp recovery registered in manufacturing over the third quarter of 2009-10, is being sustained in the fourth quarter. However, in the CSO’s numbers, while the growth of manufacturing GDP was estimated at 14.3 per cent during the third quarter of 2009-10, it is predicted to touch only 8.7 per cent in the fourth quarter. If manufacturing GDP growth turns out to be substantially higher, then aggregate GDP growth could indeed match the advance estimates, even if growth in ''community, social and personal services'' is lower than expected.
The difficulty is that ''annual'' point-to-point growth rates, whether those ''points'' are a particular day, week or month, are influenced not just by the figure recorded in the most recent period, but in the base period, which in this case is the corresponding month a year back. Growth could be high because of a ''base effect'', where a low base value can generate a high rate of growth, just as much as a high base value can generate a low rate of growth. Thus, though the January 2010 figure reflects a very high growth rate of manufacturing relative to a year back, the IIP has stagnated relative to the previous month. Moreover, while January and February 2009 where characterised by relatively low base values of the IIP for manufacturing, the figure shot up in March 2009, which would therefore depress the month-on-month growth rate in March 2010 because of the base effect.
What then do the January growth figures signify? If we compute the growth rate of the average value of the indices of manufacturing production during the 12 months ending January 2010 relative to the corresponding figure for the previous year, the rate of growth of manufacturing production rose from 4.1 per cent in 2008-09 to 8.2 per cent in 2009-10. This is the kind of improvement we can expect in financial year 2009-10 relative to 2008-09. Interestingly, the CSO’s advance estimates expect the growth of GDP in manufacturing to rise from 3.2 per cent over 2008-09 as a whole to 8.9 per cent in 2009-10, which corresponds broadly to trends in the IIP. Thus, the CSO’s figures for manufacturing do indeed seem to correspond with trends in the IIP for the year as a whole, implying that the recent ''revival'' in manufacturing cannot make up for any short fall in GDP growth in services relative to that provided for in the advance estimates. There is reason, therefore, to be sceptical about the growth story being told in the Economic Survey 2009-10 and the Budget for 2010-11. Final GDP estimates, which come with a lag, would tell whether the government’s tendency to focus on the growth figures, while playing down the implications of rising inflation, was a strategy to deflect attention or warranted by actual developments on the ground.
The 7.2 per cent figure is now repeatedly quoted by official spokespersons, with the Finance Minister reportedly declaring in his reply to the general discussion on the budget in the Lok Sabha that it ''was not a pipe dream but a reality''. If true, the 7.2 per cent figure does give cause for celebration. Though GDP growth is by no means the best indicator of a nation’s health, that figure is creditable given the global context in which it has been realised.
But is 7.2 per cent the true figure? What has been underplayed by the government and the media is that two days after the Economic Survey was released and a day after the budget was tabled in Parliament, the CSO put out its GDP figures for the third quarter of 2009-10. According to those figures, growth in the third quarter was down to 6 per cent from 7.9 per cent in the second quarter and a marginally higher 6.1 per cent even in the first quarter. The ''turnaround'' does appear to have been short-lived. Moreover, ''community, social and personal services'', which grew at 12.7 per cent in the second quarter, possibly as a result of the implementation of the Sixth Pay Commission’s recommendations, recorded a 2.2 per cent decline in its contribution to GDP in the third quarter. This, combined with a 2.8 per cent decline in GDP from ''agriculture, forestry and fishing'', brought the GDP growth rate down by close to 2 percentage points relative to the previous quarter.
This reversal of the turnaround raises a question. If the government is still sticking to its 7.2 per cent growth figure for 2009-10, what are the aggregate and sectoral GDP growth rates needed during the fourth quarter to ensure this outcome? Since the quarterly estimates of GDP at constant 2004-05 prices are available for the period starting with the first quarter of 2007-08, this is easy to compute. The figures indicate that GDP during the first three quarters of financial years 2007-08, 2008-09, and 2009-10, stood at Rs. 28,43,901 crore, Rs. 30,44,987 crore and Rs. 32,47,839 crore respectively. Given the actual, quick and advanced estimates of GDP for these financial years, the GDP during the fourth quarter stands at Rs. 10,49,556 crore and Rs. 11,09,986 crore during 2007-08 and 2008-09 and is predicted to be Rs. 12,05,225 crore in 2009-10.
The implication of this is that if the predicted 7.2 per cent rate of growth during fiscal 2009-10 is to be realised, growth during the fourth quarter will have to touch 8.6 per cent, compared with 5.8 per cent in the fourth quarter of 2008-09 and 6 per cent during the third quarter of 2009-10. Given quarterly trends thus far, this does appear a tough call.
Which are the sectors that are expected to contribute to this sharp recovery in quarterly GDP growth? Undertaking a similar exercise for the sectoral contributions to GDP, we find that the CSO expects growth in the fourth quarter of 2009-10 to remain negative (-0.1 per cent) in the case of agriculture, while rising sharply to 14.2 per cent in the case of ''electricity, gas and water supply'' (as compared with 7.8 per cent in the third quarter), 15.2 per cent in the case of ''financing, insurance, real estate and business services (7.8 per cent) and 15.7 per cent in the case of ''community, social and personal services'' (-2.2 per cent). These are the sectors that are expected to lift growth substantially, despite the poor performance of agriculture.
In sum, the optimism with regard to GDP growth is based on expectations of a sharp turnaround in services during the fourth quarter, when India is expected to overcome the effects of an unexpected slide in the third quarter. These expectations seem to apply to ''community, social and personal services'' as well, even though the Sixth Pay Commission effect that facilitated growth in this sector in earlier quarters is likely to be extremely weak, if present at all. Noting this is not to attempt to play spoiler in the midst of celebration. It is to make clear the kind of buoyancy on which predictions of creditable growth are based.
It could be argued that while the sectoral distribution of GDP growth predicted for the fourth quarter may not be realized, the aggregate growth rate would still match the CSO’s advance estimates, because manufacturing would perform much better in the fourth quarter than the CSO implicitly assumes. This view is supported by figures recently released by the CSO that are being interpreted as indicative of the fact that it is just not the stock market but also the real economy that has ''bounced back''. According to these figures, in January 2010 the index of industrial production (IIP) rose over the year on a month-on-month basis by 16.7 per cent for industry as a whole, and 17.9 per cent for manufacturing. In the case of manufacturing, this increase comes after month-on-month growth rates of 10.9 and 12.9 and 19.3 per cent respectively in October, November and December 2009. They therefore suggest that the sharp recovery registered in manufacturing over the third quarter of 2009-10, is being sustained in the fourth quarter. However, in the CSO’s numbers, while the growth of manufacturing GDP was estimated at 14.3 per cent during the third quarter of 2009-10, it is predicted to touch only 8.7 per cent in the fourth quarter. If manufacturing GDP growth turns out to be substantially higher, then aggregate GDP growth could indeed match the advance estimates, even if growth in ''community, social and personal services'' is lower than expected.
The difficulty is that ''annual'' point-to-point growth rates, whether those ''points'' are a particular day, week or month, are influenced not just by the figure recorded in the most recent period, but in the base period, which in this case is the corresponding month a year back. Growth could be high because of a ''base effect'', where a low base value can generate a high rate of growth, just as much as a high base value can generate a low rate of growth. Thus, though the January 2010 figure reflects a very high growth rate of manufacturing relative to a year back, the IIP has stagnated relative to the previous month. Moreover, while January and February 2009 where characterised by relatively low base values of the IIP for manufacturing, the figure shot up in March 2009, which would therefore depress the month-on-month growth rate in March 2010 because of the base effect.
What then do the January growth figures signify? If we compute the growth rate of the average value of the indices of manufacturing production during the 12 months ending January 2010 relative to the corresponding figure for the previous year, the rate of growth of manufacturing production rose from 4.1 per cent in 2008-09 to 8.2 per cent in 2009-10. This is the kind of improvement we can expect in financial year 2009-10 relative to 2008-09. Interestingly, the CSO’s advance estimates expect the growth of GDP in manufacturing to rise from 3.2 per cent over 2008-09 as a whole to 8.9 per cent in 2009-10, which corresponds broadly to trends in the IIP. Thus, the CSO’s figures for manufacturing do indeed seem to correspond with trends in the IIP for the year as a whole, implying that the recent ''revival'' in manufacturing cannot make up for any short fall in GDP growth in services relative to that provided for in the advance estimates. There is reason, therefore, to be sceptical about the growth story being told in the Economic Survey 2009-10 and the Budget for 2010-11. Final GDP estimates, which come with a lag, would tell whether the government’s tendency to focus on the growth figures, while playing down the implications of rising inflation, was a strategy to deflect attention or warranted by actual developments on the ground.
© MACROSCAN 2010